Netflix Lost 970,000 Subscribers in Q2, Beating Its Estimate by More Than 1 Million Subs

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Netflix reported its second-quarter 2022 earnings Tuesday, revealing it lost 970,000 subscribers during the three-month period that included the launch of the first part of “Stranger Things” Season 4. While that’s obviously a hit to the overall tally for the industry’s leading subscription streaming platform, it’s a far smaller hit than the loss Netflix forecast in April.

The streamer had projected a net loss of 2 million streaming subscribers for the second quarter, which spans April 1-June 30, following a surprise decline of 200,000 in Q1 (which included the loss of 700,000 Russian customers after exiting the country over the invasion of Ukraine).

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Netflix revealed in its Q2 letter to shareholders it currently has 220.67 million subscribers globally and 73.3 million in the U.S., and is expecting to return to gains in Q3, projecting an addition of 1 million subs from July 1-Sept. 30. In a nutshell, Netflix lost 1.3 million subscribers in the U.S. and Canada, stayed flat in Latin America, lost about 770,000 in Europe and West Asia and grew by about 1 million subscribers in the Asia Pacific region.

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In terms of financial performance for Q2, Wall Street forecast earnings per share (EPS) of $2.96 on $8.04 billion in revenue for the streamer’s second quarter, according to analyst consensus data provided by Refinitiv. Netflix reported diluted EPS of $3.20 on $7.97 billion in revenue, with free cash flow for the quarter coming in at $13 million, compared to a loss of $175 million in the year-ago quarter and black ink of $802 million in Q1.

Revenue was up 8.6% year over year, or “13% excluding a $339 million foreign currency impact,” per Netflix. Operating income for the quarter was $1.6 billion, with net income at $1.4 billion.

The company also stated it took a $70 million hit for severance costs in the second quarter following several rounds of layoffs, and is adjusting its operating model for slower top-line growth. Netflix also took an $80 million non-cash impairment charge for “certain real estate leases primarily related to rightsizing our office footprint.”

During its Q1 earnings presentation in April, Netflix said it was focusing on cracking down on password sharing and exploring a cheaper ad-supported option. It has since made movement on both fronts, creating payment plans for password-sharing households in several countries and picking Microsoft as its partner in building the ad-supported tier, which Netflix said in its Q2 letter to shareholders Tuesday it now expects to launch in “the early part of 2023.”

“We’ll likely start in a handful of markets where advertising spend is significant,” per the letter. “Like most of our new initiatives, our intention is to roll it out, listen and learn, and iterate quickly to improve the offering. So, our advertising business in a few years will likely look quite different than what it looks like on day one. Over time, our hope is to create a better-than-linear-TV advertisement model that’s more seamless and relevant for consumers, and more effective for our advertising partners. While it will take some time to grow our member base for the ad tier and the associated ad revenues, over the long run, we think advertising can enable substantial incremental membership (through lower prices) and profit growth (through ad revenues).”

With “Stranger Things” Season 4, which just last week garnered 13 Emmy nominations, including outstanding drama series, Netflix deviated from its binge-release practice. The first seven eps were released May 27 (to spur signups and reduce churn in Q2) with the two concluding segments dropping July 1 (so they would fall in Q3). The high cost of rolling out marquee programming can be seen in Netflix’s forecast for its operating margin for Q3, which is projected to drop to 16% from 20% in Q2 and 23.5% in Q3 2021.

The break from tradition paid off in viewership, with Volume 1 of “Stranger Things 4” becoming Netflix’s most-watched English-language series, a datapoint that is determined by how much a title is watched over its first 28 days of availability.

Netflix execs previously said the streamer intends to spend around $18 billion on content this year. In Tuesday’s earnings letter, the company emphasized its shift toward producing most of its content in-house, in order to have maximum flexibility with rights to its series and movies for the long haul.

“We’re now more than a decade into transforming our service from licensed second run content to mostly Netflix originals – including more than five years into building out our internal studio to produce the majority of our original titles (60% of our net content assets on our balance sheet are Netflix-produced),” Netflix wrote in the shareholder letter. “We’re now through the most cash-intensive part of that transition. As a result, our cash content spend-to-content amortization expense ratio peaked at 1.6x (along with peak negative FCF of -$3.3B in 2019) and is expected to be about 1.2-1.3x in 2022 and to decline going forward, based on our current plans, which assume no material expansion into new content categories in ‘23.”

Netflix stock closed Tuesday at $201.63 per share. The regular U.S. stock markets will reopen Wednesday at 9:30 a.m. ET.

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